By Tiernan Ray

It's a question many have pondered in the last week: Why is Microsoft (MSFT) paying $7.2 billion to acquire the handset operations of Nokia (AAPL) (NOK), which was already the most prominent partner for Microsoft as regards its Windows Phone operating system.

Today, Bernstein Research's Mark Moerdler reiterates an Outperform rating, and a $41 price target, writing that the deal is “incrementally negative” for Microsoft, but that it really comes down to just one thing: “Microsoft acquired Nokia to assure themselves a position in the mobile phone market in order to protect their consumer Windows business (~$6.8B in FY 2013) and to a much lesser extent their corporate Windows business.”

On the negative side of the account, the Nokia deal brings up Microsoft's shortcomings in consumer products and pushes the company deeper into the lower-margin hardware business, as far as investors are concerned, writes Moerdler:

We believe that investors see this as an increase in investment and attention towards the consumer business which has not been successful. Doubling down on mobile phones:Microsoft has hadnumerous false starts in its attempt to become a significant competitor in the mobile phone market. Moving more aggressively into the hardware business:Microsoft recently wrote down $900M in Surface RT hardware and booked much less than expected Surfacerevenue and now increases its exposure to hardware as well as adding a substantial, significant lower margin phone business.

On the plus side, maybe Microsoft can benefit from use of Nokia's famed distribution channel and the non-exclusive license to Nokia's patents:

We believe that with this acquisition Microsoft will gain one of the largest distribution channels that they will leverage not only for their phone but also devices (Surface tablets, Xbox, other potential devices) and potential other solutions (e.g. Microsoft Office Home Premium edition). We also believe Nokia's patents are key assets, and could be leveraged throughout Microsoft and beyond the phone business (e.g., map related IP can be integrated through the company's product portfolio).

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There are 9 comments

SEPTEMBER 12, 2013 2:56 P.M.

Anonymous wrote:

LOL!

SEPTEMBER 12, 2013 3:02 P.M.

dkbl54 wrote:

Analyst are always late in any opinion. MSFT boards are not dumb or they did not take action in rush. They are smart.NOK will give good handle in mobile business. AAPL is all about mobile and they did right thing.

SEPTEMBER 12, 2013 3:13 P.M.

john wrote:

MSFT had an already $5 billion commitment to nokia over 5 years. So what does it really cost them with the addition to patents and potential profit of hardware?

SEPTEMBER 12, 2013 3:25 P.M.

griffin wrote:

All I know is these anal-ysts have had a sell rating on NOK stock for years and here I am having tripled my money since September 2012. All the short-sellers can schuck it.

Long Nokia since late 2011 $1.76 per/share and bought more this last July $3.227.

SEPTEMBER 12, 2013 4:31 P.M.

mkt-voix-d-raison wrote:

The only reason MSFT bought NOK is to stop someone else buying it. Windows Phone would die without NOK. Imagine if AAPL had bought Nok's devices division (for 7bn), changed the O/S to theirs, and had a non premium second brand (NOKIA) for the emerging market. That $7bn would have cost them a lot less than the loss in market cap with their newest utterly uninspiring new launch. This would have been a major strategic move for AAPL in preserving the cachet premium of the iphone and having a second brand for emerging markets. Now that's genius!

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.